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Endogenous Nontradability and Macroeconomic Implications

Author

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  • Reuven Glick
  • Paul Bergin

Abstract

This paper advocates a new way of thinking about goods trade in an open economy macro model. It develops a simple method for analyzing trade costs that are heterogeneous among a continuum of goods, and it explores how these costs determine the endogenous decision by a seller of whether to trade a good internationally. This way of thinking offers new insights into international market integration and the behavior of international relative prices. As one example, it provides a natural explanation for a prominent and controversial puzzle in international macroeconomics regarding the surprisingly low degree of volatility in the relative price of nontraded goods. Because tradedness is an endogenous decision, the good on the margin forms a link holding together the prices of traded and nontraded goods. The paper goes on to find that endogenizing trade has implications for other basic macroeconomic issues.
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Suggested Citation

  • Reuven Glick & Paul Bergin, 2003. "Endogenous Nontradability and Macroeconomic Implications," Computing in Economics and Finance 2003 106, Society for Computational Economics.
  • Handle: RePEc:sce:scecf3:106
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    References listed on IDEAS

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    1. Mussa, Michael, 1974. "Tariffs and the Distribution of Income: The Importance of Factor Specificity, Substitutability, and Intensity in the Short and Long Run," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1191-1203, Nov.-Dec..
    2. Paul R. Bergin & Reuven Glick, 2003. "Endogenous Tradability and Macroeconomic Implications," NBER Working Papers 9739, National Bureau of Economic Research, Inc.
    3. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
    4. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
    5. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
    6. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    7. Andrew B. Bernard & J. Bradford Jensen, 2004. "Why Some Firms Export," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 561-569, May.
    8. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    9. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August.
    10. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 141-153, February.
    11. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-839, December.
    12. Caroline M. Betts & Timothy J. Kehoe, 2008. "Real exchange rate movements and the relative price of non-traded goods," Staff Report 415, Federal Reserve Bank of Minneapolis.
    13. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
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    Cited by:

    1. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 120(3), pages 865-915.
    2. Bruha, Jan & Podpiera, Jirí & Polák, Stanislav, 2010. "The convergence dynamics of a transition economy: The case of the Czech Republic," Economic Modelling, Elsevier, vol. 27(1), pages 116-124, January.
    3. Giancarlo Corsetti & Paolo Pesenti, 2009. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Chapters,in: NBER International Seminar on Macroeconomics 2007, pages 65-116 National Bureau of Economic Research, Inc.
    4. Andrew Atkeson & Ariel Burstein, 2008. "Pricing-to-Market, Trade Costs, and International Relative Prices," American Economic Review, American Economic Association, vol. 98(5), pages 1998-2031, December.
    5. Giorgio Fazio & Ronald MacDonald & Jacques Melitz, 2008. "Trade Costs, Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade," Open Economies Review, Springer, vol. 19(5), pages 557-578, November.
    6. Cacciatore, Matteo, 2014. "International trade and macroeconomic dynamics with labor market frictions," Journal of International Economics, Elsevier, vol. 93(1), pages 17-30.
    7. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2005. "Productivity Spillovers, Terms of Trade and the 'Home Market Effect'," CEPR Discussion Papers 4964, C.E.P.R. Discussion Papers.
    8. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2007. "Productivity, terms of trade and the `home market effect'," Journal of International Economics, Elsevier, vol. 73(1), pages 99-127, September.
    9. Naknoi, Kanda, 2008. "Real exchange rate fluctuations, endogenous tradability and exchange rate regimes," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 645-663, April.
    10. Dennis Novy, 2010. "Trade Costs and the Open Macroeconomy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(3), pages 514-545, September.
    11. Torben M. Andersen, 2007. "Fiscal Policy Coordination and International Trade," Economica, London School of Economics and Political Science, vol. 74(294), pages 235-257, May.
    12. Luca Guerrieri & Dale Henderson, 2005. "Investment-Specific and Multifactor Productivity in Multi-Sector Open Economies:Data and Analysis," Computing in Economics and Finance 2005 143, Society for Computational Economics.
    13. Kanda Naknoi, 2005. "Real Exchange Rate Fluctuations and Endogenous Tradability," 2005 Meeting Papers 857, Society for Economic Dynamics.
    14. Paul R. Bergin & Reuven Glick & Alan M. Taylor, 2017. "Productivity, Tradability, and the Long-Run Price Puzzle," World Scientific Book Chapters,in: International Macroeconomic Interdependence, chapter 8, pages 211-248 World Scientific Publishing Co. Pte. Ltd..
    15. Novy, Dennis, 2006. "Is the Iceberg Melting Less Quickly? International Trade Costs after World War II," The Warwick Economics Research Paper Series (TWERPS) 764, University of Warwick, Department of Economics.
    16. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    17. Kanda Naknoi & Michael Kumhof & Douglas Laxton, 2005. "On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods," Computing in Economics and Finance 2005 405, Society for Computational Economics.
    18. repec:spo:wpecon:info:hdl:2441/9244 is not listed on IDEAS
    19. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2008. "Varieties and the Transfer Problem: the Extensive Margin of Current Account Adjustment," CEPR Discussion Papers 6660, C.E.P.R. Discussion Papers.
    20. Brůha, Jan & Podpiera, Jiří, 2007. "Transition economy convergence in a two-country model: implications for monetary integration," Working Paper Series 740, European Central Bank.

    More about this item

    Keywords

    transport costs; nontraded goods;

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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